Funding for Lending skewed to get SMEs borrowing

Posted on 24 Apr 2013

The £80bn Funding for Lending scheme that was designed to boost bank lending to companies has been extended for a year to January 2015.

Keen to try to help companies to borrow ahead of official economic growth figures this week, the Chancellor George Osborne is providing bigger allowances to banks who lend to small and medium sized companies.

FLS allows banks to borrow at cheaper than market rates from the Bank of England providing they pass on the lower rates to borrowers.

Incentives within the extension favour SMEs, with new allowances calculated on how banks lend to specific companies.

Next year, for every £1 of net lending to SMEs banks will be able to draw £5 from the scheme. This allowance will run until the end of the extension.

The FLS scheme was criticized in February for failing to work – the only group whose borrowing had increased were residential mortgages, with little movement in the target SME sector.

In response, the Chancellor has amended the scheme so that for the remainder of 2013, every £1 of net lending to SMEs will be worth £10 of initial borrowing allowance in 2014.

Terry Scuoler, CEO of manufacturers’ group EEF, said “This is the right call. Strengthening incentives for banks to lend to SMEs and other finance providers marks a step forward in addressing the problems faced by smaller firms in accessing credit on the right terms. Giving FLS a longer shelf life is also a helpful move.”

The FLS will also be expanded to include lending by non-bank financial institutions.

Leasing and factoring companies, which provide about £20bn of working capital to smaller businesses every year, and certain mortgage and housing credit corporations.

EEF’s Scuoler added “There is still more to do. In particular, there must be greater transparency in reporting the impact of FLS on lending to SMEs.”